Black swans and the antifragility of real estate – The Property Chronicle
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Black swans and the antifragility of real estate

The Professor

The benefits from adding real estate investments to a multi-asset portfolio have been well researched. Real estate has low correlation relative to other asset classes, high Sharpe ratios, greater proportion of total return attributable to current income versus appreciation, and somewhat predictable revenues secured by contractual leases from tenants. These attributes improve the risk-adjusted returns of portfolios that include real estate. We examined another attribute of real estate called antifragility, which is of particular relevance due to unforeseeable ‘black swan’ events such as covid-19. Antifragile investments are those whose performance improves in relation to the size of the external shocks.

Black swans

The term ‘black swans’ emanates from the published work of Nassim Taleb on the subject of mathematical finance, uncertainty and randomness. Traditional financial models assume exogenous shocks are outlier events with low probability of occurrence. Yet it was only 12 years ago that we had the global financial crisis. Black swans are by definition unknowable in likelihood and timing of occurrence. Furthermore, the impact of such shocks is also unknowable in advance. Taleb contends that it is more important to construct portfolios that incorporate ‘antifragility’ rather than seeking to model ‘unknown unknowns’.


There are essentially four return distribution outcomes as shown below. Robust outcomes are where outlier events are low in probability and have small consequence, either positive or negative. Investment performances are fairly predictable since outcomes are not materially impacted by shocks. Then there are two types of fragile outcomes: symmetric and asymmetric downside scenarios.

Both may give rise to significant negative impacts since the tails are fat. Asymmetric tails to the left means that the investment is more fragile to negative outcomes than to positive upsides. Antifragile investments, on the other hand, are asymmetric to the right. Here the fat tail to the upside means outliers tend to be positive, with large payoffs. In short, robust investments are agnostic to volatility whereas fragility implies investments tend to go badly with volatility. However, antifragile investments benefit from dislocations. In the current environment, we might think of Amazon or Zoom as benefiting from the current outlier event.

Investment convexity

Antifragile investments are also investments that benefit from volatility. Mathematically this is referred to as convexity. Convexity under Taleb’s model is different from convexity that is used for bond investments. For bonds, convexity measures the change in the price of the bond in relation to changes in the level of interest rates. As the diagram illustrates, the higher the volatility in the events under Taleb’s model the greater the payoff with convexity. Conversely, greater volatility results in greater losses for concavity. Again, think of how covid-19 has geometrically launched revenues for Zoom, and on the negative side, how it has hurt WeWork’s highly social co-working model.

Limitation of normalised distribution models

When outcomes are reasonably predictable and where no single outlier outcome can significantly impact the aggregate total Gaussian or normalised probability distributions are a good fit. The normalised distribution clusters outcomes symmetrically around the mean, and the probability of an outcome being two standard deviations away from the mean is under 5%, while three standard deviations (3-sigma events) have a probability of occurrence of just 0.3%.

The Professor

About Guy Tcheau and Norman Miller

Guy Tcheau is Managing Director of Principal Real Estate Investors, and Norman Miller, PhD, is Ernest Hahn Chair and Professor of Real Estate Finance at the Burnham-Moore Center for Real Estate, University of San Diego School of Business.

Articles by Guy Tcheau and Norman Miller

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